How do you value a company?

Price and value

Market cap is what the market pays for all the shares right now, the share price times the number of shares. It is a price, not a value. Valuing a company means working out for yourself what it could be worth and then comparing that with the price. No sum is exact, because all three ways need assumptions about the future.

Compare with similar companies. You find out what the market pays for the profit or operating profit of companies like the one you are looking at, and apply the same multiple. It is the most common way, and the next lesson goes through it.

Work from cash flows. You estimate what the company will bring in year by year and turn that into a value today. This is called discounted cash flow, and lesson 3 works it out step by step.

Work from assets. You add up what the company owns and take off its debts. It suits companies that own other companies or property best, and is explained in the lesson on net asset value.

Enterprise value: the price of the whole company

Whoever buys the whole company also takes on its debt and gets its cash. That is why enterprise value, EV, is often used: market cap plus debt minus cash. Among the largest US companies, banks and insurers aside, Oracle has the most debt compared with its market cap:

Its enterprise value is 35% larger than its market cap. Divided by operating profit, the profit before interest and tax, it gives EV/EBIT: 21.7. P/E compares the market cap with the profit after interest and tax instead, and comes to 21.2. Both say how many years of profit the price amounts to, but EV/EBIT counts the debt and P/E does not. How debt is measured is in the lesson on debt.

The numbers for one company are on its stock page.